Budget crisis

Came across this little snippet today. It got me thinking about the long-term ramifications if it comes to pass that the budget reaches these levels. They weren’t good thoughts. “The next financial crisis is around the corner” “Even as the current global financial crisis loosens its grip, the seeds of the next crisis are to be found in the developed world’s government finances. The US federal government has just run up an astonishing budget deficit of $US1,400 billion or 10% of GDP, the biggest since the World War II. The Congressional Budget Office (CBO), using realistic assumptions, has projected that the deficit will contract modestly over the next few years but remain high. In the longer term, beyond 2019, the CBO foresees a widening deficit under current policies, as population ageing and health care inflation combine to drive up the cost of social programs. By 2035, it is estimated that accumulated US government debt will be 180% of GDP, rising further to 320% by 2050. The CBO has warned that if this trend is allowed to develop, there will be a risk of debt default, capital flight from the United States, an exchange rate crisis, and hyperinflation. Whether such a crisis eventuates depends on whether and how public policy in the United States deals with the fiscal problem over the next few years. Policy changes are needed to reduce prospective government spending or increase tax revenue. The longer such policy action is delayed, the bigger and more difficult the task becomes. The more it is done through tax increases rather than spending cuts, the more government expansion will be locked in at the expense of the more productive private sector. History suggests that while politicians will do enough to avoid the disaster scenarios painted by the CBO, their action will be gradual, sporadic and incomplete. They will try to muddle through as they have for the last four decades of chronic budget deficits. The continuing chronic deficit is likely to drain capital from the private sector, dragging down productivity and the US economy’s potential growth rate. This will have implications for the global economy and Australia. Robert Carling is a Senior Fellow at The Centre for Independent Studies. His report Fiscal Shock and Awe in the United States was released this week.”